YOUR MONEY:

Will investors take to crowdfunding?

May 23, 2012|Reuters

By Lou Carlozo

CHICAGO, May 23 (Reuters) - Artists are not renowned forfinancial savvy, but their success in raising money on theInternet through donations to crowdfunding websites likeKickstarter and Indiegogo could lead the way for a new class ofinvesting. Soon investors will be able to pile money intostartups through such sites with the hope of getting more than alousy t-shirt in return.

Before April 5, U.S. regulators only allowed donation-basedcrowdfunding projects, which raise money from the general publicvia the Web.

While businesses have used such sites to get workingcapital, they have generally taken preorders foryet-to-be-created merchandise instead of selling equity. But newpossibilities are opening up because of the Jumpstart OurBusiness Startups, or JOBS, Act, which President Obama signedinto law last month.

The act provides crowdfunded businesses and investors withexemptions to the Securities Act of 1933, which prohibitedpeople with a net worth below $1 million from investing inprivate companies. For the first time, businesses can advertisefor investors without filing the standard disclosures requiredof companies with more than $1 billion in revenue.

The U.S. Securities and Exchange Commission still has 270days from the JOBS Act signing to review and make final changesto its regulation, but if the statutes stay in effect as-is,just about anyone will be able to invest in a startup or smallcompany.

"What's new is being able to offer equity in return," saysSlava Rubin, chief executive officer and co-founder of majorcrowdfunding site Indiegogo.

"And it's just the beginning," said Rubin, whose site hashelped fund more than 5,000 projects since he unveiled it at theSundance Film Festival in January 2008. "We're talking about alaw that hasn't changed in 79 years."

So is a crowdfunded investment opportunity any differentfrom pouring cash into junk bonds or penny stocks? It'simpossible to say, since the first crowdfunded investmentofferings have not hit cyberspace just yet.

But they will soon enough. Since the beginning of May, atleast two new investment-oriented crowdfunding initiatives havebeen announced -- a partnership between EarlyShares.com andNavocate, and one by the US Crowdfunding Exchange LLC.

GETTING FLEECED?

Critics of the JOBS Act worry that small investors will getfleeced.

"Institutional investors can make choices based on theinformation they have," says James Allen, head of capitalmarkets policy for the CFA Institute, a global nonprofitorganization of investment professionals. "It's the mom-and-popinvestors who are the bigger concern in this case, particularlythe people on fixed incomes, the retirees."

Allen says these people are vulnerable because under theJOBS Act, many investor protections (some put into place afterthe Enron debacle) have been bypassed.

Others, including Brookings Institution senior fellow RobertPozen, also say the act will open a new avenue for stock scamsand the highly speculative investing that gives birth tobubbles. Meanwhile, state regulators fear a Wild West mentalitywhere unscrupulous wheeler-dealers, now able to bypass anydisclosure requirements, could siphon millions from naiveinvestors.

But supporters of the JOBS Act say the new legislationcreates a sort of social media trading pit where entrepreneurscan now give everyday investors the possibility of getting in onthe next Google Inc or Microsoft Corp.

Others who back the new law's crowdfunding provisions say itwill open up investor dollars to creating, as the act's namesuggests, new jobs. Even Allen acknowledges that crowdfundingcomes at a time when "banks aren't lending to small businesses,or much of anything. They don't have much of an incentive."

NEW RESOURCE

Members of the National Association for the Self-Employedview crowdfunding as a vital new resource for startups and jobcreation.

"This will really open the floodgates to a whole new arenaof entrepreneurs who are trying to help other entrepreneursfinance their dreams," says NASE CEO Kristie Arslan. "The greatthing about crowdfunding is that it allows people to choose;you're putting your business idea out there and asking people toinvest in you and your idea. The good ideas will hopefully riseto the top."

At least the money looks good.

Indiegogo now raises "millions of dollars a month"worldwide, Rubin says.

And Kickstarter, a three-year-old major crowdfundingservice, went from $1 million pledged per month in March 2009 to$7 million in March 2011. As of May 2012, more than $200 millionhas been pledged to more than 22,000 successfully fundedcreative projects, according to Kickstarter spokesman JustinKazmark.

Among them was "Blue Like Jazz," which smashed previous filmcrowdfunding efforts by more than $145,000. The movie adaptationof Donald Miller's bestselling memoir came out in theatersnationwide last month to glowing reviews. Director Steve Taylorsays that last year, the project seemed doomed because afinancial backer walked out hours before production was tostart.

Then two of Miller's fans jumped in on Kickstarter andraised $346,000 in a few months. For their trouble, all thefunders got thank-you phone calls from Taylor (it took him abouta year to call back all 4,500 people), and those who gave athigher levels were offered bigger perks, including a cameo rolein the film.

Will Taylor fund his next film in a similar way? He says hewould not rule it out. But if he markets it as an investmentopportunity, those who fork over cash will want more than asimple "thank you" -- unless it's written on the back of acheck.